COLA Restoration Explained

Having now read in detail the New Jersey Superior Court decision in Berg v. Christie clarifying that cost-of-living adjustments (COLAS) for retirees are a contractual right in New Jersey it seems like no other conclusion is possible based on these excerpts:

In exchange for being able to sell Pension Obligation Bonds which would make the plan appear overfunded to allow for contribution holidays the state had to accede to union demands for contractual protection of benefits:

In 1997, the Legislature introduced a bill, signed into law on June 5, 1997, conforming the administration of certain State-administered retirement systems, including PERS, PFRS, and TPAF, to federal Internal Revenue Code requirements; however, the bill also established “certain non-forfeitable” pension rights. L. 1997, c. 113, § 2.4 Significant to this appeal, the law provided that vested members “shall have a non-forfeitable right to receive benefits as provided under the laws governing the retirement system or fund upon the attainment of five years of service credit in the retirement system or fund . . . .”
N.J.S.A. 43:3C-9.5(b). “[A] ‘non-forfeitable right to receive benefits’ means that the benefits program, for any employee for whom the right has attached, cannot be reduced. The provisions of this section shall not apply to post-retirement medical benefits which are provided pursuant to law.” N.J.S.A. 43:3C-9.5(a).

The 2010 pension reforms (which did not go after COLAs) recognized the 1997 non-forfeitablity language so they decided to plan ahead by removing that language for future employees:

Relevant to this appeal, Senate No. 2, enacted at L. 2010, c. 1, § 29, and codified as amended at N.J.S.A. 43:3C-9.5(b), removed public employees who had become vested members of the State-administered retirement systems on or after May 21, 2010 (the bill’s effective date), from the “non-forfeitable right” provision. Under this provision new members of the State-administered retirement systems do not have a non-forfeitable right to receive retirement benefits upon the attainment of five years of service credit. N.J.S.A. 43:3C-9.5(b).

Other highlights from the decision:

We agree with the Berg plaintiffs9 that the trial court (Judge Hurd) erred in premising its decision on the Debt Limitation and Appropriations Clauses of the New Jersey Constitution. (page 33)

Nor can we agree with the trial court’s conclusion that N.J.S.A. 43:3C-9.5(e) defeats plaintiffs’ contract claim. Subsection (e) reserves to the Legislature the “right to alter, modify or amend” the retirement systems, “[e]xcept as expressly provided herein . . . .” Ibid. (emphasis added). Reading section 9.5 as a whole, the emphasized phrase clearly refers to the rights created in sections 9.5(a) and (b), which are exceptions to the reserved right to alter, modify or amend the retirement systems. Thus, section 9.5 gives retired or vested members a non-forfeitable right to their pension benefits as described in subsections (a) and (b), while subsection (e) allows the State to modify the pension systems as to employees or retirees to whom subsection (b) does not apply. (page 35)

Mindful of our required hesitancy to infer legislative contracts, and the practical difficulties the Court described in Spina, we nonetheless find that the non-forfeitable rights statute enacted in 1997 created a contractual right. Based on our review of the legislative history of the Act, we conclude that the creation of a contractual right to pension benefits stemmed from concerns raised by public employee unions after the State, through 1994 legislation, re-valued pension fund assets and later skipped making contributions to the pension funds. (pages 41 – 42)

Based on the foregoing, we begin from the premise that the “non-forfeitable rights” clause created a contractual right to receive, upon retirement, pension benefits at the rates in effect at the time the employee attained five years of service or at the time the non-forfeitable rights statute was passed, whichever was later. The issue in this case is whether, in enacting the non-forfeitable rights clause, the Legislature intended that cost of living increases be included in that contractual right. (page 48)

While we note these issues, we agree with intervenor-plaintiffs and defendants, who both argue that, if we find section 9.5 created contractual rights, we cannot fairly decide the constitutional impairment-of-contract claim on this record. Because the trial court did not address the contract clause issue at all, and because a contract-impairment claim presents “a mixed question of fact and law,” N.J. Educ. Ass’n, supra, 412 N.J. Super. at 206 n.10, a remand is required to allow all sides to create a complete evidentiary record. Hence, we remand this case to the trial court for further proceedings consistent with this opinion. If there are additional arguments the parties wish to raise on remand concerning the impairment-of-contracts issue, they may do so. (pages 60-61).

Looking back to May, 2012 Judge Hurd never got that far:
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At this pace around July, 2016 someone will need to clear that next hurdle.

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18 responses to this post.

Well, unless I read that wrong, it would seem difficult to reduce even the FUTURE service pension accrual rate for current workers who have passed the non-forfeitable rights threshold…… which is CLEARLY necessary to save these Plans (in the absence of finding similar reductions elsewhere … such as healthcare costs).

Of course that doesn’t mean NJ will ever have the money to pay all pensions as promised, even if the legal obligation exists …. and as we saw yesterday, “declarations of financial emergency make anything possible”.

Which of course make the clearly legal cutbacks to healthcare the MUCH easier (and obvious target) for Gov. Christie’s soon-to-be-announced reductions.

Does the NJ Disaster Control Act relate to a manmade fiscal crisis? The NJ State Legislature proposed budget effectively addressed the manmade fiscal crisis using emergency measures in their toolbox, taxation of millionaires and businesses for a limited time period to add revenue to the budget to eliminate the emergency, that’s what legislators do. CC should be fully present in the now, handle the mess he and his people failed to think through and learn from the mistakes. Court manipulation and mis application of laws by the executive and judicial branches look “banana republic” not worthy of NJ.

interesting times, indeed, anon. The next 3 years is the inflection point in testing the financial fabric of our state.

Does the state attempt to get the money from the wealthy that rarely use any govt services. or the middle class that seldom use any govt services or the poor that basically use all the govt services which they are crafted for?

My guess is that the general public will prevail since the general public must be kept whole with possibly some legal notion that this takes precedence over any contractual paper obligations and also special interests do not take precedence…but only a guess.

The US Justice System is very corrupt. A judge who rules erroneously should pay a penalty, then he would break the law as easily, unless of course Chris Christie was breathing down his neck too heavily.

That is total ridiculous, the police always state that a person is innocent until proven guilty! Always comparing apples to oranges. I guess in your mind it makes since since you find anyone arrest to be guilty without the need for a trial. Your true colors have been exposed!

I do not think the Federal Court has jurisdiction the constitution limits their authority to violations of federal law, conflicts between the states and several limited areas (Indian Affairs, Immigration, Maritime Law etc. I think the state courts are charged with interpreting state law. That would be why State cases bypass federal appeals and can go to the US Supreme Court. This case is not heading there it would not be heard, although it would add another year or so to the timeline.

My guess is that Christie will drag out any COLA repayment for about 3 years … at which time, if NJ is forced to make retroactive COLA payments, they will simply be IN LIEU OF regular pension payments … because all Plan assets will have been depleted.

According to census figures total employment in Union County is at 202,372. According to New Jersey pension records 20,878 of those jobs are in government. Theoretically then 10% of the members of the Union County Democratic Committee should also be working in government to be representative of the general population. It’s not even close. When […]